London Commodity Markets - New investment could revive UK oil and gas industry

A new investment boom in Britain’s oil and gas industry could help reverse some of its recent dramatic decline, analysts say.

A total of more than £8bn of new investment has been announced by a number of companies over the last six months, creating around 6,000 specific jobs and the potential for more in the supply chain, according to trade body Oil & Gas UK.

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Analysts point to recent changes to the tax system to explain the rash of companies including Statoil and GDF Suez putting money into Britain’s North Sea oil fields, marking a big reversal after tax rises in 2011 led to a halt in investment.

‘Following a decade of fiscal instability and investor uncertainty, over the last 18 months the UK oil and gas industry has worked constructively with the Treasury to find ways to promote investment in difficult fields,’ said Oil & Gas UK’s economics and commercial director, Mike Tholen, told The Engineer via email.
‘UK oil and gas production has fallen faster than expected recently [but] the measures introduced by the government have boosted investment and we expect this to feed through to actual production over the next three to four years, with the effect of slowing and even reversing the decline.’

Mark Higginson, an oil and gas specialist and senior partner at PWC Aberdeen, said: ‘While [the government] haven’t changed the headline tax rate, there have been some rather attractive specific investment allowances for new developments and for keeping older infrastructure in place.’

These changes include the brownfield allowance that cuts taxes on companies planning to extend the life of established fields, and an extension to the field allowance for developments in small fields and the deep fields west of Shetland.

Earlier this month, UK oil company EnQuest announced it would use the brownfield allowance to invest £169m to triple production at its Thistle oilfield, securing 500 jobs and creating almost 1,000 new ones by awarding contracts to 30 companies in the supply chain.

EnQuest Aberdeen’s general manager, David Heslop, said in a statement: ‘As a result of our investment so far, which has included facilities and safety systems upgrades, a major rig reactivation programme and drilling of five new wells, production has significantly increased. With the assistance of the brownfield tax allowance, we are now able to embark on the next phase of Thistle’s late life extension programme.’

The government has also removed some of the uncertainty that existed surrounding the issue of decommissioning, further boosting investment confidence. Previously it was unclear whether companies would receive tax relief on the cost of clearing up old fields at the end of their lives.

‘It’s still finally being negotiated but essentially there’s been some progress,’ said Higginson. ‘There are good indications that that’s the way it’s going.’

Despite these moves, the industry still has some way to go to undo the nearly 20 per cent fall in North Sea oil and gas production that occurred in 2011, according to Oil & Gas UK’s 2012 economic report.

This was the result of ageing infrastructure and the halt in investment to replace or extend it, which followed the government’s increase of the supplementary tax charge on oil and gas production from 20 to 32 per cent in the 2011 Budget.

‘The impact of the Budget had a bigger effect on production [than the financial crisis],’ said Higginson.

However, he added, the North Sea is also attracting investment from companies from China and the Middle East that do not have substantial offshore expertise, which could create particular job opportunities for UK engineers.

Plus the supply chain in Scotland was increasingly focused on international industry so was more insulated from production decline in the North Sea, he said.

‘It could be a very positive story but the difficulty is the availability of qualified engineers. Many companies can’t get the numbers and the quality they need here so they’re looking overseas.’

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